Let me give you a scenario, inspired by something I caught on TV recently.
Take a successful businessman, mid 40s, a highly talented leader in his field. He wants to buy a house for which he has an unblemished credit history and his income track record and prospects are outstanding.
He has set his sights on a beautiful property that needs a little refurbishment work but will constitute great security. He wants to borrow 50% of the purchase price and he’ll fund the refurb himself.
Can he get a mortgage? Alas, no.
He’s self-employed for starters, however successfully; a one-man-band and his income is dependent on him winning contracts to do what he is good (the best) at.
No contract of employment, no certainty of income; nothing except a perfect track record. Here, it counts for nothing. The fact that the property needs work makes matters worse.
He’s only after £60. Not £60,000; just £60.
It is 1610 and the man is William Shakespeare and he’s trying to buy a house for £120.
He writes two plays a year at £6 each, so we’re looking at a five times income multiple to a self-employed, middle aged man. No deal.
I’d like to think that if there had been a “Stratford upon Avon Building Society” in 1610, Will might have had support in his quest.
Why? Well, because I think that the mutual sector is increasingly seen as the go to place for high-quality lending propositions that the larger lenders haven’t the time or inclination to consider.
Mutuals such as Saffron champion their ability to cater to “individual circumstances, using manual underwriting, rating each case on its merits” and so on.
While this approach holds firm, we are also seeing different, more creative behaviour from the mutual sector compared to banks. Intermediaries are becoming increasingly aware of ‘the mutual difference.’
But why is this?
There are a number of answers. A key one is that our business model, arguably the simplest one in the financial services industry today, is about taking deposits and lending them back out again.
Our instruction manual reads: “Step one – fund and lend. Step two – repeat step one.” We actively look for opportunities to lend.
It’s not all rosy though. Lack of scale means our funding cost is much higher than it is for banks.
We lack the breadth of income streams that banks have available to improve profitability and subsidise mortgage rates.
We’re a bit less efficient than our larger friends as well, so you might have to bear with some of our ‘idiosyncrasies’.
For Saffron, the trend of lending to more complex propositions began two years ago.
We lend on complex and prime cases, but crucially not “complex prime”. I think complex prime is a euphemism for “not prime at all, really.”
We are lending profitably, despite our higher funding costs, to people of quite outstanding personal covenant. Our average loan size in 2011 was nearer to £300,000 than it was £200,000.
Importantly for our members, the arrears ratio reported in our 2011 report & accounts is only 0.08%, so we must be doing something right.
We are real people, willing to speak to you. This is often seen as refreshing. It’s amazing to think that speaking to people has become a service differentiator in 2012, but it has.
It is great when we get thanked for what we do and we listen when we are criticised. We try to make it feel as though anyone who does business with us is doing business with a human being – a real person.
Where are we headed in 2012?
Well there’s no doubt that a couple of years ago while we were just about the only show in town for some deals, we’re now seeing more of our fellow mutuals competing for business.
That’s good; I firmly believe that there is more than enough “complex and prime” lending for us all. There is a demand to be satisfied and the mutuals are stepping up to the mark in this niche.
The cynic might say that we’re picking the crumbs that are left after the big boys have had their dinner. That does us a huge disservice.
The large lenders take up over 80% of UK mortgage lending. If they weren’t doing it, the housing market would be in real trouble.
I see the relationship between them and us as symbiotic; they have their market, we have ours and the overlap isn’t huge.
The net result is that brokers should start to see increasing levels of choice for their clients. Everyone – consumers, brokers and lenders – has the chance to win.
To return to the title of this article, lending does not, for us, ‘lose both itself and friend’ – quite the contrary, as demonstrated by reputation for approachability and fairness, combined with our outstanding arrears figures. We simply believe in doing it right.
Finally, for the record, William got his house. He paid cash.
Nb Quotes are Hamlet Act 1, scene 3.
